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Analysis and Prediction:

Date of publication: May 21, 2018 | Author: Tim Clayton

Last Week’s Summary

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Oil prices fuel inflation concerns

Oil prices moved higher once again with global benchmarks testing fresh 3-yar highs as Brent hit $80.0 p/b. Higher oil prices increased fears of higher US and global inflation pressures.


US retail sales data was close to consensus expectations with a headline 0.3% increase for April and solid underlying growth.

There were stronger than expected readings for the New York Empire manufacturing index and Philadelphia Fed index which strengthened to a 12-month high.

There were strong readings for price increases within the surveys which reinforced expectations of stronger underlying inflation in the economy.

US yields important

US bond yields continued to move higher during the week with the 10-year yield advancing to 7-year highs above 3.10% while the 30-year yield increased to near 3.25%, although there was some retracement late in the week.

Higher yields tended to put upward pressure on the dollar with the US2-year yield spread over German bonds widening to 29-year highs.


The UK labour-market data was close to expectations with a slightly weaker headline increase in average earnings of 2.6% from 2.8% previously, although the underlying pace of growth strengthened.

Domestic events had little overall impact as underlying sentiment remained weak amid further concerns surrounding a weak outlook for consumer spending.

Sterling was resilient after sharp losses over the previous three weeks.  


Italian political developments dominated during the week as the 5-Star and Lega parties moved to form a government.

During the negotiations there were reports that there would be a call for the ECB to write-down Italian debt. Although this was not an official policy according to the final document, concerns surrounding fiscal policy increased sharply.

There were also fears that the government would clash with the EU Commission and Germany which would also risk wider instability within the Euro-zone.

Italian market report

There concerns were an important factor in pushing the Euro lower against the dollar as it retreated to 4-month lows of 1.1750 and the single currency also lost ground on the main crosses.


Australian employment data overall was slightly stronger than expected, although the impact was limited with domestic factors not having a major impact.

The Swiss franc gained support from concerns over the Italian political outlook with increased support on defensive grounds as EUR/CHF retreated below 1.1800.

There was high volatility in the Canadian dollar during the week due to the impact of mixed economic data, sharp fluctuations in oil prices and NAFTA uncertainty. Concerns over a lack of progress surrounding NAFTA talks tended to put downward pressure on the Canadian currency.

US-China trade policies were also an important focus during the week. Ahead of Monday’s Asian open, US Treasury Secretary Mnuchin stated that the US would not be imposing punitive sanctions on China following progress in trade talks. As risk conditions improved, the yen lost ground.

Next Week’s Forecast & Events

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Bond yields will remain important

The movement in bond yields in both the US and Europe will be an important factor during the week ahead. Renewed increases in US yield would tend to put upward pressure on the dollar. Further upward pressure on Italian yields would reinforce concerns surrounding the Italian outlook and tend to undermine the Euro.


US economic data is relatively limited during the week with the durable goods data on Friday as well as the revised University of Michigan consumer data.

The jobless claims data on Thursday could be significant given the run of very low claims over the past three weeks.

The Federal Reserve policy minutes from May’s policy meeting will be scrutinised closely given the importance of policy for currency markets.

The statement was slightly less hawkish than expected and markets will look at underlying rhetoric to assess whether momentum is building for a faster pace of rate increases.

Hints that the Fed is considering a faster pace of rate hikes would boost the US dollar.


The latest UK consumer inflation data on Wednesday will be the most important domestic factor during the week, especially as recent data has been slightly weaker than expected. Any fresh increase in inflation would trigger renewed pressure for a Bank of England rate hike.

Ahead of the inflation data on Tuesday, Bank of England members will testify to the House of Commons Treasury Select Committee with members looking for greater clarity on potential interest rate hikes.

The retail sales data will be published on Thursday amid expectations that underlying spending will remain weak.

Revised second-quarter GDP data will be released on Friday.


The latest PMI releases are due on Wednesday and will be important for underlying expectations surrounding the outlook. The recent data has suggested an underlying slowdown in the economy and any evidence of acceleration in the data would potentially trigger a rethink.

The German IFO data is due on Friday following a notable decline in the past few months amid concerns that the German economy is stalling.

Italian political developments will continue to have an important impact during the week.

Trade policies in focus

The NAFTA debate will continue to be an on-going focus amid doubts whether the US, Mexico and Canada are close to a deal. US-China relations will also be important after the announcement that the US will not impose sanctions on China. Positive rhetoric would limit yen support.

Oil prices will remain important

Oil prices will again have an important impact during the week with prices again trading at close to 3-year highs. Renewed gains in prices would reinforce inflation concerns and also tend to put upward pressure on bond yields, although there would also be doubts surrounding the growth outlook.

Currency Forecast for Next Week

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 timTim Clayton is a market analyst with more than 20 years of experience in the financial markets, with particular focus on currencies. Holds an economics degree from University of New York. Writes for multiple publications including and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics. 

Information expressed in this article and on as a whole does not constitute as financial advice. If you decide to make any actions based on the information you read, we shall not be held responsible.


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